The Economic effects of trade liberalization under oligopoly PublicDeposited

Descriptions

In modern economies, national governments have a wide
range of policies for restricting international trade and
protecting domestic industries at their disposal. The most
popular form of non-tariff trade policies is probably that
of a direct quantitative restriction. This policy takes
two principal forms: explicit import quotas and voluntary
export restraints (VERs). A VER is a quota imposed by an
exporting country upon exports to other countries in response
to pressures exercised by the importing countries
(i.e., in the form of threats of various types of import
restrictions).
When these two policies are partially liberalized,
subject to a reasonable foreign share in the domestic market,
product differentiation between imported goods and
domestic goods within an imperfect market can serve to increase
welfare levels within the domestic economy. In this
situation, the foreign share will not be as high as it
would be for the homogeneous assumption. Under a partial
VER liberalization policy, if the degree of substitutability
between domestic and imported goods is sufficiently
small, then domestic welfare will improve as foreign imports
are increased. That is, if domestic and imported
goods are perfect substitutes, then the most favorable
domestic policy will be to close domestic markets to the
foreign country since no country can allow foreign market
shares as high as 66 percent in the domestic market.
In a simulation of U.S. automobile industrial production,
when a partial quota liberalization is observed,
welfare levels can be increased by reducing the Japanese
import market share to a level below 10 percent, that is,
to a level which is less than the actual current foreign
market share. In real terms, this implies that U.S. auto
industry must be further liberalized to acquire additional
domestic benefits under a VER policy, whereas the U.S.
should restrict foreign market share below 10 percent to
maximize domestic welfare levels under a quota policy.
This will occur if the net consumer surplus is in excess of
producer net excess profits under an imperfect market
structure.